SpiceJet: Curiouser & Curiouser!

The Spicejet deal gets curiouser & curiouser. Over the last 40 days the ownership, management and control of Spicejet has been taken over by Ajay Singh. The deal was done via a scheme of reconstruction and revival and in an off-market transaction Singh acquired the 58.46% stake owned by erstwhile promoter Kalanithi Maran. The Marans have resigned from the Spicejet board and Ajay Singh is the new promoter. But we still have no details regarding the reconstruction & revival scheme, no disclosure of the acquisition price and considerable legal confusion over the missing mandatory open offer. Now, 40% of Spicejet is owned by the public. So here’s where I'm stuck – can a public listed company be acquired without disclosing the acquisition scheme or the purchase price? CNBC-TV18's Menaka Doshi speaks to JSA’s Somasekhar Sundaresan and NDA’s Nishchal Joshipura for some answers.

Kalanithi Maran transfers Spicejet stake to Ajay Singh via ‘Scheme of Reconstruction and Revival for the takeover of ownership, management and control of SpiceJet Limited’

Doshi: What do you make of what I have just laid out as the transaction process, the fact that we have no disclosures on this so called scheme and no information on what the transaction price was or the price at which the Maran's sold their stake to Ajay Singh in an off-market transaction?

Sundaresan: This is extraordinary, is an understatement. This is unprecedented. This very company has changed hands, there has been an open offer in the past for this very company. Kingfisher tried to get revived through an exemption from the open offer with a lot of confabulations between the aviation ministry and SEBI, that did not happen, that was not allowed. So, to call a takeover a scheme of reconstruction, to call a ministry competent authority and avail of exemptions for schemes of arrangement which typically are about compromises and arrangements under company law, I think this is a real big one. The least one should do to justify something so extraordinary is to let people know what the terms are. I think it is a bit shocking to see this in day and age, that an exemption of this nature can happen with absolutely no transparency.

SPICEJET: CURIOUSER & CURIOUSERTakeover Regulations

Exemptions From Open Offer10 (1) (d) acquisition pursuant to a scheme(ii) of arrangement involving the target company as a transferor company or as a transferee company, or reconstruction of the target company, including amalgamation, merger or demerger, pursuant to an order of a court or a competent authority under any law or regulation, Indian or foreign;

Doshi: Let me also put to you in addition, the fact that the disclosures that have been made most recently for instance the Form B and D filings made by both the Maran's and Ajay Singh where they speak of this off-market transaction in the column which asks for buy value, they have put the face value of shares and not the actual transaction price. In the filing made by Ajay Singh under regulation 10(6) of the substantial acquisition and takeover regulations, when asked to disclose the price at which the shares are proposed to be acquired, he said that in terms of the share sale and purchase agreement the consideration paid by the acquirer for the acquisition of these shares is confidential. Can you explain to me whether the takeover code or the listing agreement in the case that determines what a company needs to disclose or all the regulations that we have that determine material disclosures allow for a price to be held confidential?

Joshipura: This is bizarre. For the first time, confidentiality is being claimed for a mandatory public disclosure. I do not know how Sebi or stock exchange have not asked for the details of the price. Not only the price I think the other issue which is also there is that there are no details on the scheme of revival or reconstruction even though para 36 of the listing agreement requires any material event to be notified to the stock exchange.

They have followed the letter of law, they have informed the stock exchange that there is a scheme of revival which is going to be there but at the same time if you look at the spirit of the law, spirit is to inform the public in case of any material event which is happening with the company. If you look at the listing regulations which unfortunately are not yet effective and are going to replace the listing agreement, there is a specific section on what are the contents which should be disclosed for each of the events under para 36 where there is a specific mention about scheme of restructuring and there it is mentioned that the details of the restructuring need to be specifically disclosed. So, clearly the laws currently are not sufficient to get the disclosures which are there. If you ask me, this is a classic case where the letter of law has been followed, all loopholes have been clearly exploited. However if you look at the spirit of the transaction, I think there are many gaps.

Sundaresan: I would quarrel that. I don’t think even the letter of law is met. I think it is a contrivance. It is a complete contrivance to force fit this under the exemption for a scheme. This is a private transaction in a public company. It is not some private deal. When you acquire close to 60 percent of a listed company every provision that requires disclosure needs to be met. To begin with if there is an exemption being availed of at the minimum, the form says spell out the price. I think fundamentally whether the exemption is even available to them is questionable. SEBI has a lot to answer in this case. This is not a transaction where there is some composite rearrangement of debts due and replacing that with equity as you see with CDR or any such thing. It is a takeover. You simply do a takeover of existing shareholding, exit of the most substantial shareholder who not too long ago himself had made an open offer for the shares of this very company being given an exit at a price which is not known to the public shareholders who deserve an exit under the claim of an exemption calling it a scheme?

A scheme or a reconstruction which requires an approval of some authority doesn’t mean that every single contract to takeover a company can be called as scheme and brought within the ambit of this exemption. I think this is extraordinary and needs to be looked at. There is a lot of explaining both by Sebi and by the government to do, to explain this.

Doshi: There are several legal arguments that are being made. I have been talking to a bunch of lawyers over the last few weeks saying there is some sort of reconstruction going on because Ajay Singh is going to recapitalise the airline, bring in other investors as well etc. Those are some of the sort of alleged plans because we don’t have anything on paper.

Sundaresan: Let me ask them this, why did SEBI have to write an exemption order for IFCI? IFCI was being restructured, the government pumped in money to take care of IFCI, Sebi had to put pen to paper and write a public order as to why it is not requiring the government to make an open offer. So is the case of every nationalised bank which is listed and was given an explicit transparent detailed exemption with a positive order from the securities market regulator.

Here what is happening is, that a private owner of a public company gets an exit at an undisclosed price, terms not disclosed to the public shareholders, it would otherwise trigger an open offer, you call that takeover a scheme of takeover of management and ownership and reconstruction, call the Ministry of Civil Aviation a competent authority and then say this force fits within the exemption. In my view the letter of the law too is not met. Section 12A of the SEBI Act says a contrivance or a device to circumvent provision of the regulation is itself a violation. This to me appears to be a contrivance which is structured purely to force fit within the exemption.

There are judgments where schemes approved by a court of law have been held to be a contrivance and an open offer has been forced which has been even upheld all the way in appellate processes. In that light to have a share purchase agreement masquerading as a scheme is extraordinary.

Doshi: Do you agree with this whole issue of open offer exemption? Several lawyers pointed out to me why are you raising this issue after all Ajay Singh is rescuing a beleaguered airline and the fact that the airline is now able to return to operations in itself is a good thing. They also said in the very same breath that don’t you remember that under the earlier takeover regulations, a sick company that had an order from BIFR to reconstruct itself was able to get exemptions from SEBI. So, if BIFR's order can be a competent order or competent authority order why can't the Ministry of Civil Aviation's order be a competent authority order?

SPICEJET: CURIOUSER & CURIOUSERTakeover Regulations

Exemptions From Open Offer10 (1) (d) acquisition pursuant to a scheme(ii) of arrangement involving the target company as a transferor company or as a transferee company, or reconstruction of the target company, including amalgamation, merger or demerger, pursuant to an order of a court or a competent authority under any law or regulation, Indian or foreign;

SPICEJET: CURIOUSER & CURIOUSERTRAC Report

‘…the Committee felt that where the schemes entail a transformation of the target company, it would be desirable to continue to provide for an exemption from the obligation to make an open offer.’

SPICEJET: CURIOUSER & CURIOUSERTakeover Regulations

Exemptions From Open Offer10 (2) The acquisition of shares of a target company, not involving a change of control over such target company, pursuant to a scheme of corporate debt restructuring…provided such scheme has been authorised by shareholders by way of a special resolution passed by postal ballot, shall be exempted from the obligation to make an open offer under regulation 3.

Joshipura: If you look at the language of the exemption it talks about a scheme of reconstruction sanctioned by a court or by a competent authority under any law whether in India or foreign. If you look at the TRAC Committee report also, if I remember it right 12.7 was the para number, there also with respect to scheme of reconstruction it is mentioned that where any company is going to be transformed based on the scheme of reconstruction that particular scheme of reconstruction deserves an exemption from open offer. Som will be able to better talk about it since he was part of the TRAC Committee report. However, if you look at the language of the exemption together with what was mentioned in the TRAC Committee report there is a case for Ajay Singh that there should not be an open offer but on the flip side if you look at it regulation 10(2) talks about CDR schemes and there is an exemption for CDR schemes where it doesn’t result in change in control. Which means that if there are CDR schemes which result in change in control you have to make an open offer or go to SEBI under regulation 11 to take an exemption. If you look at it from that perspective, at the end of the day what is happening is that there is a revival of the company which is resulting in change in control which ideally should mandate an open offer or an exemption from SEBI. However on the other hand there is another section 10(1)D which covers the case which we are talking about. I understand there are lot of arguments on what is competent authority…. (Interrupted)

Doshi: What is your opinion, will this exemption pass muster with SEBI or will it not?

Joshipura: It is a tough one. If you look at the language of the law and again the transaction has got over, SEBI has not yet questioned it, stock exchange has not yet questioned it, looks like based on where we are right now SEBI doesn’t have an issue with that. If you look at the spirit of the law and some of the points which Som also made which lot of people are making, there is clearly a case that this should not fall under the exemption.

Doshi: The exiting promoter that is the Maran's on their way out are subscribing to some 3.75 million preference shares of Spicejet which will cost them roughly Rs 375 crore. If I add this to the deal it becomes even more unique because I have rarely ever heard of an exiting promoter providing financing to the company that he is about to leave. What would you expect the regulator to do given the oddities that this transaction has exposed?

Sundaresan: I think an exiting promoter putting in money would typically be done where the incoming guy believes that the exiting chap dint run it well or he needs to put money back into the company. In redeemable preference shares it is as good as quasi debt. This will also need shareholder approval. One would have thought that if you are doing that you would again go to the shareholders to seek permission for preference shares, this is very intriguing to find that a shareholder getting an exit or potentially it could even be that the consideration being paid to the Maran's for exiting this company was made a condition to be brought into the company so that they don’t benefit from the exit. All of this may point to a meritorious exemption which may positively be given with a transparent published order. I have no quarrel if SEBI puts pen to paper, explains reasons and sets out why there should be an exemption. However what is being done just now is extraordinarily contrived and it is not something that meets an exemption.

Doshi: All of us agree that the lack of disclosure is the most perturbing part of this transaction.